Capitalism

The most obvious one-word answer to the question why did China boom is capitalism. As Peking University economist Michael Pettis puts it, China boomed simply because the government got rid of "idiotic policies" rooted in Stalinist and Maoist economics, letting the market do its magic. Indigenous market energy attracted diaspora, East Asian, and eventually global capital investment, allowing Chinese products to reach markets worldwide. The Behemoth was born. But questions remain as to the nature of China's economic model, as opinions range from skeptical to triumphalist. Capitalism is at the essence of the boom-- but what kind of capitalism? And where will it lead?

Hong Kong Provided China with Capital

Japan Provided Support for Reform

Reform Transformed the Countryside

Changing China's Market Framework

Trevor Houser

Partner, Rhodium Group

Trevor Houser, visiting fellow at the Peterson Institute for International Economics and the Colin Powell Center for Policy Studies, is a partner at the Rhodium Group (RHG), a New York-based research firm, and adjunct professor at the City College of New York. His work focuses on energy markets, climate change, and the role emerging Asian countries play in both. His publications include China's Energy Evolution: The Consequences of Powering Growth at Home and Abroad (forthcoming, with Daniel Rosen), Leveling the Carbon Playing Field: International Competition and US Climate Policy Design (2008), and China Energy: A Guide for the Perplexed (2007).

From an economic perspective, as important as what happened in those 30 years, is what happened in the 30 years before. So, the period from '48 to '78 laid the groundwork for the type of dynamism that we saw after. And the analogy that I like to use is a slingshot. So, since 1978, we’ve averaged 9% economic growth in China and the reason, in part, that that growth was so fast, was because the growth before it was so distorted. So, it’s like you take a slingshot and if you pull it in the wrong direction for 30 years and then you let it go, the speed with which the stone you have in your slingshot travels is going to be light speed. And that’s what happened in China. So, in 1949, when the CCP comes to power, Mao Zedong takes the country, the People’s Republic of China, in an economic direction that is not conducive to its resource endowment. China has a lot of labor, doesn’t have a lot of resources, and doesn’t have a lot of capital. Other countries in East Asia with that type of endowment, like Japan and Korea and Southeast Asia, were doing the types of economic activities that having a lot of labor makes you very good at. So, we’re talking about light manufacturing, like toys and textiles and apparel. China, on the contrary, decided to follow a Soviet model of industrialization. So, instead of doing things that required a lot of labor, it decided to do things that took a lot of resources and a lot of capital. So, steel and aluminum and cement, a lot of capital-intensive heavy industry. Over 30 years, that economic strategy brought the country to the point of famine, a number of times...